Online Advice Firms Will Be a Disruptive Force

In “Automating
Advice: How Online Firms Are Disrupting the Market for Online Advice,” Celent
researchers suggest traditional providers of financial advice must change the
way they do business or face radical disruption in client prospecting and
retention efforts. Online firms have gained significant market traction in the
last five years, according to the report, most notably in the domain of
investment advice and passive portfolio management.

Online firms appear
to be particularly well suited to deliver investment-oriented services because
of the fragmentation of traditional delivery models and the adoption of
passive investing strategies, which can be delivered effectively in the way of
model portfolios and rebalancing algorithms. There is also the potential for
disruption in the areas of personal financial management and personalized
financial planning, the report says.

Celent researchers find low-cost online providers of financial advice have a value proposition
that resonates among lower-income and younger-generation investors, especially
Millennials and those in Generation X. These groups still value face-to-face
contact with professional service providers, but they are also more familiar
with conducting important financial tasks online.

(cont)

The report suggests many traditional advice providers have
responded to the online adviser threat by moving up market, targeting more
affluent investors who value in-person meetings and highly individualized
service. However, Celent warns this strategy may offer only temporary respite
as online advice providers become more sophisticated and younger generations of
investors secure more wealth.

The report also discusses a variety of
ways firms can abandon this defensive crouch, mainly by building on their inherent
competitive advantages that cannot necessarily be matched by inexpensive online
advice. For instance, firms that specialize in holistic financial planning and
highly customized investment approaches may find it easier to out-sell online
advisers. Again, Celent warns that even this approach may fail in the long run
as online advice models are improved by innovative digital providers.

“Traditional advisers and the financial institutions that
employ them must put aside legacy practices to deliver digitized advice and,
ultimately, digital relationships,” says William Trout, senior analyst with
Celent’s securities and investments group. “In short, they need to take a page
out the book being written by the automated providers.”

Celent also suggests there is an ongoing convergence taking
place as investment services providers increasingly embrace the concepts of
individualized financial planning and personal financial management. This move
could challenge the success of both online and real life advisers, Celent
warns.

The abstract of the report, as well as information on how to
obtain a full copy, is here.